FX Weekly Update – April 12th, 2021
Posted Under: Weekly updates
The dollar retreated last week, reversing the last few weeks of gains. Our first thought is that the dollar had been riding the wave of higher long-term U.S. interest rates, higher equity prices and the continued uptick in Covid 19 vaccines. Let us unpack these. First, the U.S. interest rate remains flat (0.16%), and as much as the 10-year rate is discussed at every turn the main driver for the dollar is the short-term rates and they are not moving. The Fed continues to keep their foot on the brake and will until 2023. Equity markets are making new historical highs every week but why? Expectations of demand, sure, but more importantly the amount of government programs, whether Covid related or infrastructure, there will be a lot of money entering the system, so the combination of low short-term yields and these new stimulus packages are putting long-term dollar buyers on the sideline. Lastly, Covid vaccines are impacting the global population, and those countries that had been struggling with delivering them are catching up to the U.S. Leveling the field and moving the markets back to considering the amount of cash that the U.S. Treasury is pumping into the market combined with higher taxes, will drive the inflation and of course the possibility of an equity bubble.
EUR (1.1890): Last week the euro rallied through resistance areas of 1.1850 without hesitation. We thought that the EUR would rally and fail at the 1.1850 level but that did not happen. The high last week was 1.1927. The week ahead can have another rally toward 1.2000. Not only has the EUR moved higher against the dollar, but it has also moved higher against the GBP and the JPY. These three, USD, GBP and JPY, will continue to weaken against the EUR. All for their separate reasons. We discussed the US dollar but the pound continues to struggle with Brexit and of course, when global assets rally, the yen will fall because it is considered a funding currency.
GBP (1.3685): EUR/GBP is driving the pound’s weakness. GBP is falling near medium-term trend line resistance at 1.3575. This should be a critical area. Assume stop-loss orders below this and the next level of support at 1.3475. Brexit may be behind this. The U.K. is struggling with trade deals, specifically with northern European countries. This will keep short-term pressure on GBP and may take some time to work itself out.
CAD (1.2550): The Canadian dollar has gained slightly against the US dollar. There is not much to uncover with the move. Oil prices are dealing at $60/bbl, remaining below the $66/bbl level from February. Commodities tend to trend and move in a technical way (once a trend begins, there is consolidation, followed by a further rally). The CAD follows the same type of movement. Assume the rally in CAD to match a rally in oil with a bit of a delay and we are still looking for the currency to rally toward the 1.2200, as oil prices rise.
JPY (109.60): The yen fell to 110.50 early in the week before reversing course and falling back to 109.06. The move flushed out weak long position is and gave those investors looking to enter the market the opportunity. The week ahead does look like more choppy trading. We would expect the US dollar to retreat against the yen and potentially revisit last week’s low.
MXN (20.1800): We will keep the same view on the peso as we did last week. The US dollar does look vulnerable. 19.85 and 19.30 are the support areas. Resistance at 20.40 and 20.50.
CNY (6.5600): Last week we discussed the PBOC’s comfort level of around 6.5500. The 6.6000 and 6.6900 are resistance areas, with 6.5000 and 6.4500 support. With an escalation of issues around Taiwan and a continued debate over how the U.S. administration will negotiate with China going forward, the currency will remain steady.